News Corp: The Stock Implications of the Ongoing Scandal

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Early this week News Corp’s (NASDAQ: NWS) stock price held up at 19.44, with the 52-week range of 13.83 to 20.79, after the latest developments in the UK scandals. Not only that, it rose the next day to 19.78. Perhaps there's confidence in the magic touch of News Corp head Rupert Murdoch.

As the world knows by now, Reuters reported that two Sun journalists had attempted suicide and are in the hospital. Attempted suicides are no small problem. Only a few weeks ago the suicide issues at Foxconn reverberated around the news outlets. After all, this was a Chinese iPhone assembly plant, so Apple needed to address these problems head-on.  Apple continues to ride high but it is paying lots more attention to corporate social responsibility in managing its global supply chain.

For investors, the subject of suicide also triggers concern about the underlying issues. After all, that kind of information could provide plenty of insight into corporate issues which could weigh on the stock price ultimately. One can interpret this latest incident in a larger ongoing saga in many different ways. Perhaps the bribery scandal has journalists fearing the implications of the crackdown. Perhaps the issues run deeper than we expected. Any diagnosis is speculative at this point, but last year's hacking investigation at the now-shuttered News Of The World lead to an alleged suicide by former reporter and whistleblower Sean Hoare. These problems don't seem to be disappearing.

Of course, beyond speculation about News Corp's suicide issues, we want to focus on the underlying business. Generally, publishing is in a sorry state in many spots globally. News Corp’s Australia’s newspapers helped contribute to a loss in the company’s publishing segment. That is mostly due to the continuing drop in revenues from print advertising, which isn't being replaced by what's coming in from digital ads. 

Here in the US, The New York Times Company (NYSE: NYT) had a loss of $39.7 million for 2011 versus a profit of 109.7 million for 2010. The Washington Post Company (NYSE: WPO) reported for fiscal 2011 net income of $116.2 million, compared with $277.2 million the year before. There is a formal deathwatch taking place regarding which newspapers, if any, could be around in 5 years.

Incidentally, one bright spot in the business and one of those which could make it during the next five years is Gannett (NYSE: GCI), at least according to a Market Watch article. Recently a number of insiders such as Director Howard Elias bought the stock. Obviously many other factors come into an analysis of a stock, but Market Watch predicts it could outperform the S&P 500 index over the next 12 months.  

Likely any sale of News International, if it were to take place, would not be immediate. First the investigation has to be concluded. The legal fallout in term of lawsuits has to be wrapped up so that the companies can be sold without any legal legacy. Here in the U.S. corporations such as ARCO (NYSE: ARCO) which had, decades ago, acquired companies which had manufactured or sold lead paint, faced trial after trial regarding the alleged damage done. Because of litigation like that, those on the prowl for an acquisition now will do their legal due diligence carefully.

But a sale could happen, even though Murdoch claims those UK newspapers are “part of him” and he is described as having “ink in his veins.” Last week News Corp president, chief operating officer and deputy chairman Chase Carey even explicitly said that if it were sold the stock would have a higher rating. Currently it is undervalued and with good reason since its margins – operating at 15.3%, gross at 37.33% - are low for the industry. Carey’s statement paves the way for a future sale, especially if News Corp tries another run at buying BSkyB. Investors would cheer if that was the first step in ridding the company of all its newspapers holdings. For 2Q of fiscal 2012, although publishing had losses, the other segments, ranging from cable to film, grew.  

Could all the newspapers go, including Murdoch’s crown jewel The Wall Street Journal?  Murdoch might eventually see that as useful to prevent agitation among shareholders. He has shown in many ways that he will take drastic measures to resurrect his ailing media empire.

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